<PAGE>
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
[ ] Transition Report Under Section 13
or 15(d) of the Exchange Act
For the transition period ended ________________________________
COMMISSION FILE NUMBER 000-21701
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CAROLINA FINCORP, INC.
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(Exact name of small business issuer as specified in its charter)
NORTH CAROLINA 56-1978449
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
115 SOUTH LAWRENCE STREET, ROCKINGHAM, NC 28380
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(Address of principal executive office)
(910) 997-6245
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. YES X No____
---
As of October 30 1998, 1,905,545 shares of the issuer's common stock, no par
value, were outstanding. The registrant has no other classes of securities
outstanding.
This report contains 11 pages.
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PART 1. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED)
<TABLE>
<CAPTION>
Page No.
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<S> <C>
Consolidated Statements of Financial Condition
September 30, 1998 and June 30, 1998...................................... 3
Consolidated Statements of Operations
Three Months Ended September 30, 1998 and 1997............................ 4
Consolidated Statements of Cash Flows
Three Months Ended September 30, 1998 and 1997............................ 5
Notes to Consolidated Financial Statements................................ 6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................................................... 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................. 10
</TABLE>
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<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
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CAROLINA FINCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
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<TABLE>
<CAPTION>
September 30,
1998 June 30,
ASSETS (Unaudited) 1998 *
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(In Thousands)
<S> <C> <C>
Cash on hand and in banks $ 1,029 $ 961
Interest-bearing balances in other banks 2,854 7,811
Investment securities available for sale, at fair value 9,317 10,295
Investment securities held to maturity, at amortized cost 5,598 5,670
Loans held for sale - 1,057
Loans receivable, net 87,666 83,623
Accrued interest receivable 654 583
Premises and equipment, net 2,132 2,076
Stock in the Federal Home Loan Bank, at cost 735 735
Foreclosed real estate 20 20
Other assets 955 1,080
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TOTAL ASSETS $110,960 $113,911
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LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposit accounts $ 93,851 $ 93,415
Other borrowed funds - 3,200
Accrued interest payable 140 152
Advance payments by borrowers for property taxes
and insurance 307 419
Accrued expenses and other liabilities 1,037 1,337
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TOTAL LIABILITIES 95,335 98,523
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STOCKHOLDERS' EQUITY
Preferred stock, no par value, 5,000,000 shares authorized, no shares issued and outstanding - -
Common stock, 20,000,000 shares authorized; 1,905,545 shares issued and outstanding 7,846 7,852
ESOP loan receivable, unearned ESOP compensation and
unvested restricted stock (2,473) (2,531)
Retained earnings, substantially restricted 10,213 10,042
Unrealized holding gains 39 25
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TOTAL STOCKHOLDERS' EQUITY 15,625 15,388
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TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $110,960 $113,911
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</TABLE>
* Derived from audited financial statements
See accompanying notes.
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CAROLINA FINCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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<TABLE>
<CAPTION>
Three Months Ended
September 30,
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1998 1997
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(In Thousands except per share data)
<S> <C> <C>
INTEREST INCOME
Loans $ 1,760 $ 1,671
Investments and deposits in other banks 314 454
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TOTAL INTEREST INCOME 2,074 2,125
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INTEREST EXPENSE
Deposit accounts 1,075 1,004
Borrowings - 4
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TOTAL INTEREST EXPENSE 1,075 1,008
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NET INTEREST INCOME 999 1,117
PROVISION FOR LOAN LOSSES 34 23
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NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 965 1,094
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OTHER INCOME
Transaction and other service fee income 95 78
Gain on sale of loans 68 12
Other income 28 64
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TOTAL OTHER INCOME 191 154
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OTHER EXPENSES
Personnel costs 404 382
Occupancy 43 36
Equipment rental and maintenance 41 52
Marketing 20 16
Data processing and outside service fees 77 76
Federal and other insurance premiums 22 23
Supplies, telephone and postage 29 30
Other 82 76
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TOTAL OTHER EXPENSES 718 691
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INCOME BEFORE
INCOME TAX EXPENSE 438 557
INCOME TAX EXPENSE 159 202
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NET INCOME $ 279 $ 355
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NET INCOME PER COMMON SHARE
Basic and diluted $.16 $.20
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Weighted average shares outstanding 1,762,201 1,754,332
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DIVIDEND PER COMMON SHARE $.06 $.06
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</TABLE>
See accompanying notes.
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CAROLINA FINCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
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1998 1997
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(In Thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 279 $ 355
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 39 44
Amortization, net 1 (10)
Gain on sale of assets, net (68) -
Origination of mortgage loans held for sale (2,974) (764)
Proceeds from sale of loans held for sale 4,099 776
Release of ESOP shares 17 26
Amortization of stock awards under management
recognition plan 34 -
Provision for loan losses 34 23
Deferred income taxes - (20)
Deferred compensation 13 15
Change in assets and liabilities
Increase in accrued interest receivable (71) (73)
(Increase) decrease in other assets 125 (57)
Decrease in accrued interest payable (12) (23)
Increase (decrease) in accrued expenses and other liabilities (320) 135
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NET CASH PROVIDED BY
OPERATING ACTIVITIES 1,196 427
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CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest-earning balances in other banks 4,957 (1,141)
Purchases of:
Available for sale investment securities - (3,544)
Held to maturity investment securities (1,000) (503)
Proceeds from sales, maturities and calls of:
Available for sale investment securities 1,000 4,987
Held to maturity investment securities 1,070 73
Net increase in loans (4,077) (2,235)
Purchase of property and equipment (95) (61)
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NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES 1,855 (2,424)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand accounts (296) 1,355
Net increase (decrease) in certificates of deposit 732 1,375
Decrease in borrowed funds (3,200) (500)
Decrease in advance payments by borrowers for taxes and insurance (112) (117)
Cash dividends paid (107) (104)
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NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES (2,983) 2,009
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NET INCREASE IN
CASH ON HAND AND IN BANKS 68 12
CASH ON HAND AND IN BANKS, BEGINNING 961 1,790
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CASH ON HAND AND IN BANKS, ENDING $ 1,029 $ 1,802
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</TABLE>
See accompanying notes.
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CAROLINA FINCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
In management's opinion, the financial information, which is unaudited, reflects
all adjustments (consisting solely of normal recurring adjustments) necessary
for a fair presentation of the financial information as of and for the three
month periods ended September 30, 1998 and 1997, in conformity with generally
accepted accounting principles. The financial statements include the accounts of
Carolina Fincorp, Inc. (the "Company") and its wholly-owned subsidiary, Richmond
Savings Bank, Inc., SSB ("Richmond Savings" or the "Bank"), and the Bank's
wholly-owned subsidiary, Richmond Investment Services, Inc. Operating results
for the three month period ended September 30, 1998 are not necessarily
indicative of the results that may be expected for the fiscal year ending June
30, 1999.
The organization and business of the Company, accounting policies followed by
the Company and other information are contained in the notes to the consolidated
financial statements filed as part of the Company's annual report on Form 10-
KSB. This quarterly report should be read in conjunction with such annual
report.
NOTE B - NET INCOME PER SHARE
Net income per share has been computed by dividing net income by the weighted
average number of shares of common stock outstanding during the period. In
accordance with generally accepted accounting principles, management recognition
plan shares and employee stock ownership plan shares are only considered
outstanding for the basic earnings per share calculations when they are earned
or committed to be released. Unearned shares in the management recognition plan
had no dilutive effect for the three months ended September 30, 1998. No
potentially dilutive securities were outstanding during the three months ended
September 30, 1997.
NOTE C - COMPREHENSIVE INCOME
On July 1, 1998, the Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" (SFAS No. 130). This pronouncement
establishes standards for the reporting and display of comprehensive income and
its components in a full set of financial statements. Comprehensive income is
defined as the change in equity during a period for non-owner transactions and
is divided into net income and other comprehensive income. Other comprehensive
income includes revenues, expenses, gains and losses that are excluded from
earnings under current accounting standards. This statement does not change or
modify the reporting or display in the statement of operations. SFAS No. 130 is
effective for the Company for interim and annual periods beginning on or after
July 1, 1998. Comparative financial statements for earlier periods are required
to reflect retroactive application of this statement. For the three months ended
September 30, 1998 and 1997, total comprehensive income, consisting of net
income and unrealized securities gains and losses, net of taxes, was $293,000
and $394,000, respectively.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF OPERATIONS
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COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1998 AND JUNE 30, 1998
Consolidated total assets decreased by $2.9 million during the three months
ended September 30, 1998, from $113.9 million at June 30, 1998 to $111.0 million
at September 30, 1998. This decrease resulted from the use of liquid assets to
repay on July 3, 1998 borrowings of $3.2 million that had been outstanding as of
the beginning of the quarter. The borrowings had been obtained during the prior
quarter to provide funding for payment on June 18, 1998 of a special $6.00 per
share return of capital dividend which aggregated $11.4 million.
During the quarter, reductions of $5.0 million and $1.0 million, respectively,
in interest-bearing balances in other banks and investment securities available
for sale, together with the sale of $1.1 million of loans which were held for
sale at June 30, 1998, provided funding for the repayment of borrowings
discussed above and for an increase of $4.0 million in loans receivable, which
grew from $83.6 million at the beginning of the quarter to $87.7 million at
quarter end.
Total stockholders' equity was $15.6 million at September 30, 1998 as compared
with $15.4 million at June 30, 1998, an increase of $237,000 which resulted
principally from net income of $279,000 for the quarter, while the regular
quarterly dividend aggregated $107,000 or $.06 per share. At June 30, 1998, both
the Holding Company and the Bank continued to significantly exceed all
applicable regulatory capital requirements.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1998 AND 1997
Net Income. Net income for the quarter ended September 30, 1998 was $279,000,
or $.16 per share, as compared with net income of $355,000, or $.20 per share,
for the three months ended September 30, 1997, a decrease of $76,000 or $.04 per
share. This decrease resulted principally from a reduction of $10.1 million in
net interest earning assets arising from the payment on June 19, 1998 of a
special dividend that aggregated $11.4 million. Based upon yields currently
available on liquid assets, payment of the special dividend in June had the
effect of reducing net interest income and income before income taxes during the
three months ended June 30, 1998 by approximately $150,000, while reducing after
tax net income by approximately $95,000.
Net Interest Income. Net interest income for the quarter ended September 30,
1998 was $1.0 million as compared with $1.1 million during the quarter ended
September 30, 1997, a decrease of $118,000. The decrease resulted primarily from
payment to the special dividend discussed under the caption "Net Income," offset
somewhat by a larger concentration of interest earning assets in higher yielding
loans during the current quarter.
Provision for Loan Losses. The provision for loan losses was $34,000 and
$23,000 for the quarters ended September 30, 1998 and 1997, respectively. There
were net loan charge-offs of $4,000 during the quarter ended September 30, 1998
as compared with net charge-offs of $15,000 during the quarter ended September
30, 1997. At September 30, 1998, nonaccrual loans aggregated $109,000, while the
allowance for loan losses stood at $467,000.
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Other Income. Other income was $191,000 for the quarter ended September 30,
1998 as compared with $154,000 for the quarter ended September 30, 1997, and
increase of $37,000 resulting principally from an increase in gains from the
sale of loans.
Other Expenses. Other expenses increased to $718,000 during the quarter ended
September 30, 1998 as compared with $691,000 for the quarter ended September 30,
1997 an increase of $27,000. Substantially all of this increase related to
personnel costs which increased by $22,000 principally as a result of costs
attributable to awards previously granted under the Management Recognition Plan.
Exclusive of personnel costs, other expenses increased by $5,000 or 1.6% during
the current quarter, principally as a result of the opening of a full service
branch in Laurinburg to replace the loan production facility that the Bank had
previously operated there.
Provision for Income Taxes. The provision for income taxes, as a percentage of
income before income taxes, was 36.3% for each of the quarters ended September
30, 1998 and 1997.
LIQUIDITY AND CAPITAL RESOURCES
The objective of the Company's liquidity management is to ensure the
availability of sufficient cash flows to meet all financial commitments and to
capitalize on opportunities for expansion. Liquidity management addresses
Richmond Savings' ability to meet deposit withdrawals on demand or at
contractual maturity, to repay borrowings as they mature, and to fund new loans
and investments as opportunities arise.
The primary sources of internally generated funds are principal and interest
payments on loans receivable, cash flows generated from operations, and
repayments of mortgage-backed securities. External sources of funds include
increases in deposits, advances from the FHLB of Atlanta, and sales of loans.
As a North Carolina-chartered savings bank, Richmond Savings must maintain
liquid assets equal to at least 10% of assets. The computation of liquidity
under North Carolina regulations allows the inclusion of mortgage-backed
securities and investments with readily marketable value, including investments
with maturities in excess of five years. Richmond Savings' liquidity ratio at
September 30, 1998, as computed under North Carolina regulations, was
approximately 17%. On a consolidated basis, liquid assets also represent
approximately 17% of total assets. Management believes that it will have
sufficient funds available to meet its anticipated future loan commitments as
well as other liquidity needs.
As a North Carolina-chartered savings bank, Richmond Savings is subject to the
capital requirements of the Federal Deposit Insurance Corporation ("FDIC") and
the North Carolina Administrator of Savings Institutions ("N. C.
Administrator"). The FDIC requires state-chartered savings banks to have a
minimum leverage ratio of Tier I capital (principally consisting of common
shareholders' equity, noncumulative perpetual preferred stock, and a limited
amount of cumulative perpetual preferred stock, less certain intangible assets)
to total assets of at least 3%; provided, however, that all institutions, other
than those (i) receiving the highest rating during the examination process and
(ii) not anticipating or experiencing any significant growth, are required to
maintain a ratio of 1% or 2% above the state minimum. The FDIC also requires
Richmond Savings to have a ratio of total capital to risk-weighted assets of at
least 8%, of which at least 4% must be comprised of Tier I capital. The N. C.
Administrator requires a net worth equal to at least
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<PAGE>
5% of total assets. At September 30, 1998, Richmond Savings exceeded the capital
requirements of both the FDIC and the N. C. Administrator.
THE YEAR 2000
The Year 2000 issue confronting the Company and its suppliers, customers,
customers' suppliers, and competitors centers on the inability of computer
systems to recognize the Year 2000. Many existing computer programs and systems
were originally programmed with six digit dates that provided only two digits to
identify the calendar year, without considering the upcoming change in the
century. Monitoring and managing the Year 2000 project will result in additional
direct costs. Management presently believes that with modifications to existing
software and conversions to new software, which were completed during the first
quarter of 1998, the Year 2000 matter will be mitigated without causing a
material adverse impact on operations. However, if such modifications and
conversions are not made, or are not completed timely, the Year 2000 issue could
have a material impact on the operations of the Company. Relations with third
parties in which electronic data is exchanged exposes the Company to some risk
of loss in the event the other party makes a mistake or is unable to perform. In
the Year 2000 context, the Company is working to identify where such exposure
may exist and is in the process of developing contingency plans in order to
minimize risk of loss due to third parties' Year 2000 vulnerabilities. In
addition, the Company has initiated formal communications with all of its
significant suppliers and large customers to determine the extent to which it is
vulnerable to those third parties' failure to remediate their own Year 2000
issues. There can be no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the Company in
future periods. The full cost for becoming Year 2000 compliant has not been
determined; however, management believes it will not be material to the
Company's financial statements.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
(27) Financial data schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the
quarter ended September 30, 1998.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CAROLINA FINCORP, INC.
Date: November 2, 1998 By: /s/ R. Larry Campbell
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R. Larry Campbell
Chief Executive Officer
Date: November 2, 1998 By: /s/ Winston G. Dwyer
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Winston G. Dwyer
Chief Financial Officer
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,029
<INT-BEARING-DEPOSITS> 2,854
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,317
<INVESTMENTS-CARRYING> 5,598
<INVESTMENTS-MARKET> 5,668
<LOANS> 88,133
<ALLOWANCE> 467
<TOTAL-ASSETS> 110,960
<DEPOSITS> 93,851
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,484
<LONG-TERM> 0
0
0
<COMMON> 7,846
<OTHER-SE> 7,779
<TOTAL-LIABILITIES-AND-EQUITY> 110,960
<INTEREST-LOAN> 1,760
<INTEREST-INVEST> 314
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<INTEREST-TOTAL> 2,074
<INTEREST-DEPOSIT> 1,075
<INTEREST-EXPENSE> 1,075
<INTEREST-INCOME-NET> 999
<LOAN-LOSSES> 34
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<EXPENSE-OTHER> 718
<INCOME-PRETAX> 438
<INCOME-PRE-EXTRAORDINARY> 0
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<NET-INCOME> 279
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
<YIELD-ACTUAL> 3.78
<LOANS-NON> 109
<LOANS-PAST> 0
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<LOANS-PROBLEM> 20
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